Practice Midterm Quiz 13b

Question 1

54. Judy Maxwell is a new assistant professor of quantum chromodynamics at the University of Panaca.
    • Her salary is $180,000.
    • The university agrees to contribute an amount equal to 12% of Judy’s academic year salary into a retirement fund; Judy acquires legal title to these retirement contributions only if she stays at the university for six years or more. [Note: This retirement money is NOT withheld from Judy’s salary; this is additional money that comes from the university.]
    • Historically, approximately 40 percent of new assistant professors have remained with the university at least six years.
    • The university withholds $6,000 per year from Judy’s salary as her contribution to medical coverage. The university pays a health insurance company $11,000 per year per employee for medical coverage.
    • Judy has a term life insurance policy through the university because of the favorable group rate she can get. The $600 per year cost is withheld from her salary. If she were to get the same insurance on her own, it would cost $1,500.
    • The Social Security tax rate is 6.20 percent; this amount is withheld from just the first $100,000 of Judy’s salary; amounts earned above $100,000 are not subject to Social Security tax. In addition, the university must match this amount and pay it to the federal government.
    • The Medicare tax rate is 1.45 percent; this amount is withheld from all of Judy’s $180,000 salary. In addition, the university must match this amount and pay it to the federal government.
    • Federal income taxes totaling 20 percent of Judy’s $180,000 salary are withheld from Judy’s pay.

From the standpoint of the university, what is the TOTAL COST of having Judy Maxwell on the faculty for one year?

a. $208,450
b. $202,450
c. $221,410
d. $290,410
e. $215,410

Answer 1

54.
Solution = B

Salary	$180,000
Social Security ($100,000 × 0.0620)	6,200
Medicare ($180,000 × 0.0145)	2,610
Medical ($11,000 – $6,000)	5,000
Retirement ($180,000 × 0.12 × 0.40)	8,640
Total compensation cost	$202,450

Question 2

55. Before 1992, how did companies such as General Motors account for retiree healthcare benefits?

a. Fair value accounting
b. Deferral accrual accounting
c. Pay-as-you-go accounting
d. Reserve recognition accounting
e. Partial allocation accounting

Answer 2

55.

Solution = C

Question 3

56. Which ONE of the following is NOT one of the three elements of the Fraud Triangle?

a. Rationalization
b. Perceived opportunity
c. Perceived pressure
d. Perceived self respect

Answer 3

56.

Solution = D